macro economics -determination of income and employment
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Institution
this comprises of all the topics that are explained in an understandable manner and very easy to contains topics like liquidity trap,transaction and speculation motion,commercial banks,advancing of loans,story of lala,credit creation by commercial banks ,process of credit creation .
In this chapter let us understand a few basic concepts relating to
the determination of income and employment.
In order to understand this chapter, we need to understand the
meaning of concepts like Ex- ante and ex- post.
Ex-ante-refers to what has been planned
Ex-post- refers to what actually happened i.e. reality.
CONSUMPTION:
The most important determinant of consumption demand is
household income. A consumption function describes the relation
between consumption and income. The simplest consumption
function assumes that consumption changes at a constant rate as
income changes. Of course, even when the income is zero, some
consumption still takes place. Since this level of consumption is
independent of income, it is called as Autonomous
Consumption.
Consumption can be defined as C = C̅ + cY,
Where C =consumption expenditure of households,
C̅ = Autonomous consumption and
cY = induced consumption
cY shows that consumption depends on income.
INDUCED CONSUMPTION:
cY is that part of consumption that depends on income.
If income rises by rupee 1, induced consumption rises by MPC or
C. (It is denoted by C)
MPC = Marginal Propensity to Consume
,MPC is defined as a rate of change of consumption due to
changes in income.
MPC = ΔC/ΔY = C
MPC or C = ΔC/ΔY, where Δ=change
(C= Consumption; Y= Income)
Value of MPC:
When income changes there is a change in consumption. But
change in consumption can never exceed the change in income.
The maximum value of C or MPC can take is 1. If the consumer
chooses not to change consumption even when income changes
then the value of MPC will be a zero; MPC = 0
The value of MPC lies between 0 and 1
If the consumer uses the entire income on consumption
then the value of MPC will be 1, i.e. MPC = 1
If only a part of the change in income is used for
consumption then MPC < 1
For eg. If a country Imagenia has consumption function, C
=100+0.8Y (it is of the form C = C̅ + cY). It means that even
when Imagenia has zero income, consumption is 100.
Therefore 100 can be considered as Autonomous
consumption.
MPC is 0.8, it means that if the income goes up by 100,
consumption goes up by 80.
SAVINGS:
Savings is that part of income that is not spent on
consumption.
S = Y- C
Savings= Income – Consumption
MPS = Marginal Propensity to Save
MPS= ΔS/ΔY
, MPS or S = ΔS/ΔY
But Savings = Y- C
MPS or S = ΔS/ΔY
MP S or S = Δ(Y-C)/ΔY
=ΔY/ΔY – ΔC/ΔY
i.e. = 1-ΔC/ΔY,
Therefore, 1-C is the value of MPS (since ΔC/ΔY = C)
Therefore MPS = 1-C OR
MPS = 1- MPC
Some important definitions:
1. Marginal propensity to consume (MPC):
Marginal propensity to consume is defined as a change
in consumption due to a change in income. It is
denoted by ‘C’.
MPC = ΔC/ΔY
2. Marginal propensity to save (MPS):
Marginal propensity to save is defined as a change in
savings due to a change in income. It is denoted by ‘S’
and
S = 1-C OR 1- MPC
3. Average Propensity to consume (APC):
Average Propensity to consume is defined as
consumption per unit of income.
APC = C/Y
4. Average Propensity to save (APS):
Average Propensity to save is defined as savings per
unit of income.
APS = S/Y
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